CEO Salaries: Too Much on the Up-and-Up?

An article in today's New York Times examines chief executives'
salaries, noting a gap between them and the paychecks of executives
directly beneath CEOs.

May 25, 2007

An article in today’s New York Times examines chief executives’
salaries, noting a gap between them and the paychecks of executives
directly beneath CEOs.

According to the story:

As executive pay has surged in most American companies, attention has
focused on the growing gap between the earnings of top executives and
the average wage of workers in cubicles or on the shop floor. Little
noticed, though, is how much the gap has also widened between the
summit and the next few echelons down.

Do You Know What You're Worth?

Few are deprived in corporate suites, of course. But the widening
disparities in business, which show up in a variety of other ways,
reflect a dynamic that is taking hold across the economy: the growing
concentration of wealth and income among a select group at the pinnacle
of success, leaving many others with similar talents and experience
well behind. …

This even more skewed pattern at and near the top of the income ladder
has become a sort of national standard. From 1985 to 2005, the incomes
of taxpayers in the top 10th of earnings rose about 54 percent after
inflation, to an average of $207,200, according to Thomas Piketty of
the Paris School of Economics and Emmanuel Saez of the University of
California, Berkeley.

But among the top 1 percent of taxpayers it increased 128 percent, to
$812,500. And among the top 0.01 percent it nearly quadrupled, to $14
million on average. …

Standard views tend to splinter between corporate apologists, who say
that top executives have tougher jobs and are more deserving than in
the past, and critics who accuse many of them, in essence, of doing
little more than larding their pay at the expense of stockholders.

Home Depot

A MarketWatch.com story today reported on Home Depot CEO Frank Blake’s thoughts on executive pay:

Home Depot Inc. Chief Executive Frank Blake, fresh from his first
annual go-round with shareholders Thursday, said he believes the outcry
over his predecessor’s hefty pay package is part of a larger "societal
shift."

Speaking to reporters after the annual meeting, Blake fell just short
of defending whether former CEO Robert Nardelli deserved the rich
compensation and retirement package he received.

Nardelli — who was forced out of the top job in January because he
refused to reduce his roughly $200 million pay package — has been
widely referred to as a poster child for excessive executive
compensation. Though he was nowhere to be seen at the meeting, his name
and legacy loomed large, drawing boos from shareholders at times.

"My view on Bob’s pay issue is we’re seeing a societal shift around
what shareholders are willing to pay their CEOs," Blake said. "There
are things that aren’t acceptable now that were acceptable then."

What to Do?

The U.S. government has stepped into the fray, crafting regulations and
legislation to improve the executive pay system. According to a
February 2007 CRS report, such actions have tried to empower
shareholders by: requiring disclosure of CEO pay that’s easy to
understand, making boards more responsive to shareholders, and
mandating that shareholders directly approve executive pay.

The report also notes:

According to various observers, once on the board, directors are reluctant to press managers on pay because unless cordial relationships prevail, the board will find it
difficult to function. This would help explain why CEO pay never seems
to fall even though polls show that significant numbers of directors
believe CEOs are overpaid: no one wants to be the first to cut pay.

Government reforms can help increase transparency in executive pay. But
maybe lasting change calls for a combination of more diligent boards
plus laws and regulations–a group effort, of sorts.